Following the announcement of the GST council meeting with online gaming as one of its key agenda, the gaming sector has been worrisome due to the government’s stance on increasing the Goods and Service Tax (GST) imposed on the sector to 28% from 18%. While the GST council is set to hold a meeting on July 11, industry players are not in favour of the GST increase.
“Currently, online skill-based gaming companies pay tax at 18% on the platform fees (Gross Gaming Revenue). Even discussions of a potential increase to 28% GST or any valuation change to the entire stake value have had a huge impact on the industry as these ambiguities resulted in a complete pause to any capital that could have come into the sector. Even if the tax is levied solely on the platform fee at a rate of 28%, it is highly likely that online gaming startups and new ventures would lack the financial strength to bear the cost, ultimately resulting in their closure,” Saumya Singh Rathore, co-founder, WinZO Games said.
The GST council has assigned a committee of state ministers led by the chief minister of Meghalaya, Conrad Sangma in order to address the issue of taxation in the gaming industry. The committee held its stance of 28% tax rate on the total value, including winnings. However, not being able to reach a consensus within the committee, the report was submitted in December.
As per the Deloitte-FIFS report, the Indian fantasy sports industry is set to grow by 33% compound annual growth rate and would reach 50 crore users by 2027. The industry grew by 31% to Rs 6,800 crore in FY22 and is expected to touch Rs 25,240 crore by FY27. However, the increase in the tax rate would see a major change in the predictions. According to experts, the Indian digital gaming industry can lead the global entertainment and gaming market. At least five major Indian gaming companies are gunning for IPOs, and it is expected that the sector will witness the emergence of 10 unicorns and five decacorns. The industry has attracted investments, both domestic and overseas, amounting to $500 million in 2022 while generating employment and revenue.
Industry experts believe that a nuanced approach is required, where the tax is levied on the Gross Gaming Revenue (GGR) rather than the Contest Entry Amount (CEA). Taxing the GGR ensures that the tax burden is proportionate to the income generated by gaming platforms. The approach would preserve the attractiveness of skill-based games for players and safeguard the growth and contribution of the gaming industry to the Indian economy.
“Our expectations from the GST council revolve around a taxation policy that recognises the unique dynamics of the online gaming industry while ensuring its expansion and sustainability. We believe that a balanced approach to taxation is essential for the industry’s long-term success. We expect the GST council to treat the online gaming sector fairly and equally alongside other sectors, such as information technology service providers. Consistency in taxation policies encourages compliance and fosters overall growth of the industry,” Rohit Bansal, founder, Super4 told BrandWagon Online.
According to industry experts, the growth of the gaming sector will be hindered by high tax rates. The imposition of the highest tax slab would send negative signals to global investors while deterring foreign direct investment (FDI), leading to reduced capital inflows for innovation or start-ups. The excessive tax burden can adversely impact early-stage startups, resulting in a decline in profitability and barriers to new entrants subsequently negatively impacting employment generation and GDP contribution.
“We look forward to a rational and progressive GST policy for the skill gaming sector from the GST Council. Over 60 years of jurisprudence have established the difference between games of chance and skill games. The Ministry for Electronics and Information Technology has also come out with rules for regulating the skill games sector in India. These rules, along with established jurisprudence concretise the basis for taxing online games fairly,” Roland Landers, CEO, AIGF, said.
While the industry opposes the 28% GST move, it remains to be seen what decision would the government make in terms of taxation of the online gaming space.